Grant travels to Fisher Island in Miami to meet a hugely experienced value investor who has seen the world change dramatically over the course of his career. Bill Strong explains how he manages to navigate an investment landscape with diametrically different conditions than those which prevailed when he began his time on Wall Street over 40 years ago. He also recounts his experiences in the Asian crisis of 1998 and the sub-prime crisis of 2008. Finally, he lays out what he thinks to be the biggest short opportunity he’s ever seen. Filmed on May 3, 2018.

Comments

Very prescient. Comforting that even Grant found Sydney property expensive in 2005. Until recently saying this was heresy. William was exactly right about the banks restricting credit as soon as the RC commenced. Property is falling quite rapidly in Sydney now and there is a whiff of panic in the air... Thanks for a great interview

Shame I didn't see this 6 months ago but it was still a great watch. Turns out Bill has nailed this one as Westpac and Commbank are down around 20%, and property price declines have only just started to escalate in the last couple of months. This is going to get much uglier. Best 'trade idea' video I've seen on RV.

Just sold my apartment in Vancouver. I bought it years ago, loved the place and was very reluctant to sell but the valuation was so eye watering and the evidence of a bubble so compelling, that i felt i had no alternative. Had five buyers fight out for the right to buy it and accepted $90,000 over asking price, which itself had been a stretch. By the time the transaction closed, my agent told me that the market for condos had turned flat (the market for houses having already turned flat), so the evidence suggests that i timed it well. Now the most difficult question is where to invest the proceeds, with all other asset classes being equally over valued? Any suggestions? .

Don't know if anyone else mentioned this but Canadians are not allowed a mortgage that is higher than 40% of their income. This is the law! Also, the banks in Canada rely on an organization called the CMHC or Canadian Mortgage and Housing Corporation that acts as an insurer if the buyer has less than a 10% down payment for their chosen purchase. A vast number of mortgages are covered by this insurer as well as several other mortgage insurance companies. Thus, even if the Canadian market were to crater, the banks are protected...Yes, they'll take a haircut but I'm not so sure that this would be fatal for them...

Thanks for a fascinating interview. The points and risks outlined here are very compelling; however, I feel that so much rests on these related sectors in Australia that I can't believe the government will not intervene, in any way possible, to protect voters, pension funds, investors and speculators from their collapses.

Re Aussie housing, I don't understand it. I asked a friend who has a place for sale in Sydney at the moment, but doesn't reckon it'll sell, what he would want in rent if instead he ends up renting it out again. He said A$2,300 a week. I did my sums and figured that must mean that on a skinny 3.5% yield the asking price must be just shy of $3.5mn. He shot back, "I hate to depress you, but it's worth north of $5mn, I paid $3.2mn 8 years ago." It's decent 4BR family home, no pool, no views, in the desirable, inner Eastern suburbs. But WHO has the money for this stuff? The pool of wage earners who earn enough to service a $2.5mn mortgage or pay about A$120,000 a year in rent out of their after tax income, even in Sydney cannot number more than a couple of hundred thousand maximum...countrywide. The numbers don't stack up in any way shape or form. Or, maybe I'm just a bitter and twisted Gen-Xer who left Australia before the boom really got going and have been an expat for 22 years and missed out on easy riches, the way the cheerleaders for the bubble like to characterize me.

Spent the last 20 minutes thinking of flaws in the short Australia/Canada housing investment thesis. Tough to find any real weaknesses. Maybe we should create an Asian-Buyer-Of-Canadian-Property Cryptocurrency so that Asians can trade a Canadian store of value. And then Canada can spin off real housing in to a separate market so that locals can have affordable housing.
Definitely "Like" this comment if you appreciate the creativity of connecting seemingly uncorrelated bubbles. Or like it even more if you think we should actually launch that cryptocurrency next week.

A few thoughts from an another Aussie (GenX for what it's worth).
1) Property prices have gone stratospheric because of the broad loosening of credit with interest rates the lowest in 50 years. The wealth to leverage this arrived in the China boom of 2009-12. Overseas observers may not realise that no further cash is required to buy a second property in a rising market, the house is revalued up and the extra paper wealth is used to leverage the purchase of the next property. This has been an incredibly successful strategy in a rising market, with massive leveraged gains for those in early. However, these leveraged buyers are clearly heavily exposed to interest rates in a flattening market (let alone falling). The main price boom in dollar/risk terms is Sydney/Melbourne, Brisbane a long way back. Other cities can effectively be ignored.
2) The whole economy is held together by real estate at present. The FIRE sector, building construction, government permits/taxes are a giant trough at which everyone is feeding, leading to a lot of the above wealth leaking from the market. Resource companies whilst incredibly profitable employ few people and manufacturing has gone due to Dutch disease.
3) See some comments here, everyone THINKS the government and interest rate cuts will ride to the rescue, even those savvy enough to pay for RV. But 40% of bank funding is coming from offshore $US markets, and the US shows that interest rate cuts make little difference in the downturn so I am not optimistic a 1% cut here will help. And does anyone really think the Australian government can succeed where Japanese, US and UK politicians have failed to levitate their property markets.
4) Finally the catalyst may be the Royal Commission mentioned by Mr Strong. The most interesting tidbit is that there is a law that states that if the banks are deemed to have unfairly offered a consumer credit, then the consumer is not liable for the loan (think liar loan). This has caught the attention of the class action law firms which have learnt from their American colleagues.
If credit tightens the whole show is in real trouble. Either the Royal Commission, increasing global interest rates or an international recession would probably represent a sufficient trigger. I think the Aussie dollar will suffer heavily along with the above mentioned banks, but will leave it to those better qualified to assess this.

The two saving graces for consumer credit in Australia and Canada are: 1. that the RBA and BoC can drop rates by 100 basis points to soften the blow 2. Both have public sector debt at 30% and 60% (respectively) so can credibly bail out the banks.
The dangerous bubble market is the UK where rates can't be lowered, the currency has dropped 20% against the dollar, and the government debt is already at 81% of GDP.

Great Inteview 2 very smart guys
I reckon Bill you are backing a loser shorting aussie housing though. I completely agree with everything you say however I reckon your trade will not blow up but you will see a slow, soul destroying time decay. I think this bubble is a frustrating slowly leaking party balloon seen a week after the party
Why?
1. Aussies will die in the ditches to protect their homes, non recourse loans don't exist here you will sell your first born into slavery before you lose your house.
2. The aussie government will back the banks to the bitter end, whatever it takes, no matter what, we saw a taste of that in 2008 and will see it on steroids if they need to. Every aussie politiican knows the housing market is an existential issue for them, any changes coming from the royal commision will be tailored and massaged into complete irrelavancy. As the old aussie political saying goes "always back the horse called self interest it's the only one trying"
3. Wholesale funding dries up? No problem the aussie superannuation system has $2trillion in it today. Completely under the control of the government a bit of legislation magic and suddenly you have aussie government housing bonds mandated for every retirement account to own.
And I reckon Grant you are dead wrong about the bank prices dropping out of a tree in September, I am tipping that is when they bottom and we see a post commision rally.
It is different down here we are completely nuts and denial is just not a river in Africa

You get it Mark. The most important driver and variable of a market are its participants... be damned if the participants allow Australian housing to burst, when almost every Australian across industries, verticals, cultures and ethnicities have a stake in it.

As a native Brit who is living back in the UK but lived in Australia long enough to get his Citizenship, I agree with you, re. likely Government action to backstop the banks and by extension - the real estate market. This is a large part of why I stopped contributing to my Superannuation fund after I left. However, such action would make the AUD a compelling short as it would most definitely not be currency neutral, I assure you. It would also send a "Capital Controls are Us" message to international capital market participants, with associated downstream knock-on effects. I guess what I'm trying to say is, massive Government intervention to prop up a falling property market would not be without consequence. There are also a growing number of Aussie millennial voters who are completely pissed off about the current situation and a "Baby Boomer Homeowner Rescue" at their generational expense (with my generation - the Xers - caught in the middle) will not play well to them. in a nutshell, whilst I 100% agree with you about the probability and possible form of Government intervention, I think the probable negative consequences of this could result in a loss of control for them anyway - particularly if the RBA ends up being forced into doing "Aussie QE". Again, short AUD appears to be the trade to me. I also would feel comfortable betting on the boys and girls in Canberra being late to react, as the majority of politicians appear to have a hard time believing there will be a crisis until they're smack bang in the middle of one. Let's see what happens anyway - it's all to play for...

The-First-James, interesting comments and thoughts. I'm going to sit opposite to your perspective on your following comment:
"There are also a growing number of Aussie millennial voters who are completely pissed off about the current situation and a "Baby Boomer Homeowner Rescue" at their generational expense (with my generation - the Xers - caught in the middle) will not play well to them."
I am a millennial. By extension have many friends who are millennials. Also a plethora of family members across 3 generations (17 uncles and aunties equates to many related offspring!). 90% of my friends and family are not at all pissed about the current property situation. In fact, many either have cash on the sidelines, saving up to buy their first property or own their first home. Several entrepreneurial friends including myself own more than one property and are involved in other ventures. Could be anecdotal but I am friends with people across a span of classes: middle, upper and ultra high net worth. All share general consensus and aren't at all pissed about any situation.
When it comes to socialist vs capitalist, liberal vs conservative views is another story but we are talking about property here.

Now, I'm not inferring we aren't at a peak or won't experience a pull back. Which is inevitable. But talks of a bubble crash in Australian property needs to be adequately defined. Are we talking about 10-30%? 50%. 80%? 20-30% to me would be a healthy pull back. And this before we start looking at how the Australian property markets are all segmented and inverse-cyclical in some areas.

Great interview. Interesting that he didn't have any real thoughts about US markets with the exception of Energy. Everyone talks about how expensive US mkts are but Strong seems to confirm that the best shorting opportunities are likely in Developed Mkts ex US. Italy could very well be the shot across the bow warning us that the European Bond Mkt may be about to leave dead bodies everywhere.
There has been a lot of discussion for the better part of 2 years on the best way to short Canadian and Aussie Housing mkts with no easy answer since the banks pay big dividends and such. I would make the case for just being lazy and buying index puts. If Housing goes... everything goes.

By the way, in the early noughties (2001) I was browsing Perth real estate. 800m2 blocks in second tier suburbs ranged $220-320k. I remember the thought of servicing a $150-250k loan giving me sweaty palms. Those homes now push $800K-$1m+ and I cannot imagine how people are managing these levels of debt.

How is this likely to be reflected in currencies? AUD heading lower. Something USD will be heading higher. If banks are under pressure, to the point of bail outs/bail ins, and foreign money leaves. AUD is likely to weaken further, even if interest rates rise at some juncture.

I graduated college in 72 and after military service went into futures business and eventually became a market maker in fixed income futures options on the floor. I traded through all the events he described and completely agree with his sense that we are at massive secular change in the opposite direction. I have personally for my own account traded the 30 year bond futures with a 59 handle and and above 170. When I talk to traders these days they have no idea how rarefied the markets are at this time. Should also say if Mr Strong is an NBA finals level player then I am sixth man for a college intramural team.

Another aussie anecdote: My brother’s friend bought an investment property for $2 million AUD about 18 months ago. He hit a stroke of luck recently because a developer is interested in that street and is offering $2.5 mil - but after stamp duty, legal costs, and everything else he’ll only make $60 grand on the trade. He’s fuming about it haha.
God forbid prices were to fall even slightly!

Ok! Going for the Big Short on the little country! Have to agree that the property market here is in la la land. It's a perfect storm of insatiable demand, low interest rates and small market (globally speaking). I have often pondered "what would it take to burst this bubble?" The Polititians have brainwashed the younger generation into believing that the older property investors are the blame (I noticed some 'brainwashed' comments in this column) The Government has ramped up skilled migration to record levels and intends to maintain this policy and further increase the numbers - they just love importing tax-payers!! These are skilled workers/professionals with reasonable wealth, many arriving with USD, Euros or Pounds in their pockets (1.2 to 1.7 x AUD) so they have a bit of 'cash to splash' at the auctions. Also, pure foreign buying - primarily Asian, primarily Chinese - has gone way beyond what was anticipated and although some detracting policy changes have been enacted, it appears to be lip service and too little too late. Local, State and Federal Goverment are addicted to all the transaction and ongoing taxes and as all polititians, say the right thing but do the opposite - they intend to milk this cow for as long and hard as they can.. Until those two pressures have diminished, this trend will continue. Yes, credit is tightening.. but again, this is a small market (just over 1T compared to 32T for US) and there are many more Ts scouring the planet looking for investment returns. The bubble will burst but I don't think we're quite there yet. Use options - the loooooong dated ones..

Great interview. Thank you! Here is a good Australian example: I know a family of 5 living off one salary of $60k pa who have three properties and are looking to purchase a fourth. Their first home more than doubled in value allowing them to finance their first two investment properties. They cannot cover their interest costs and are currently living off the equity in their first home. They continue to have international skiing and safari holidays and live well beyond their means. When I have voiced my concerns over the property bubble they dismiss me saying that "Even if property drops 30% we would still be fine. And it will never drop far because of the level of demand." Trying to discuss issues around cash flow, slowing credit demand etc falls on deaf ears. As someone who has lived in 4 countries (including both Canada and Australia) I would have to say that the Australians I have met seem to be particularly stubborn when it comes to property. There is a strong belief that the RBA will be forced to cut rates and that the government will step in with more 'magic' as they have done in the past. When I visited an Aussie bank a few weeks ago the young woman serving me literally said that her bank's current policy is to target first home buyers to keep things going, and that they were reducing interest rates for savers to offset their costs. Interesting times, indeed.

Grant Williams; A boss interviewer and one who hits the nail on the head, thank you for such a great interview!
For anyone interested about granular info on the Aussie RE market, Martin North of DFA in Australia is ripe with info
https://www.youtube.com/channel/UCKWDscRjYFTD1KHsmow4-bQ

As a thirty something year old working at one of these major Aussie banks, I can tell you that they do not think there is a problem. The hubris to think that nothing is wrong given the egregiousness of what has transpired gives you an indication of how rotten the culture is within the FIRE sector (and particularly the banks).
I’ve had to move 110km out of Melbourne (to a small, but rapidly growing country town) due to the complete unaffordability of any form of housing (and that includes renting) anywhere near Melbourne, even though I am earning substantially more than the average income.
We’re currently a one income family with two children under three and a half and I can attest, the cost of living is becoming virtually impossible to keep up with.
Even in the small country town that I live in (where the median wage is $46k [national median is $78k]), there are 4 bedroom houses on 750-950 square meter blocks going for ~$1m!
We’ve been renting for 3 years (because I could not in good consciousness buy into this market), we were forced to buy earlier this year because the cost of servicing a mortgage was substantially cheaper than paying rent for a smaller 4 bedroom house (~$510p/w).
When I have conversations with people (family, friends, colleagues) everyone seems to be brainwashed with the notion that house prices will stay this high forever.. “It’s just the new norm” they say!
Even in the face of these damning numbers, a response I got the other day was, “oh, prices will likely just plateau here for the next 20/30 years.
The belief that this is not one of the largest bubbles in financial markets history and that prices cannot revert back towards the historical mean is so deeply ingrained that it now takes on a religious meaning.
The entire country is running towards the cliff and everyone is looking at the person next to them with a smile and on their face going “isn’t this fun”..
The fact that the government perpetuates policies such as negative gearing (while all the MP’s collectively have ~$370m worth of investment properties [most of which are negatively geared]) gives you a clear indication of why they let this get to where it is today.
The banks, the government (including the RBA), and the regulators will have blood on their hands when this is all said and done.

This was borderline emotional to watch. As an Australian millennial thats priced out of the market, It was deeply affirming to hear this as I am judged by family and friends for my views on the housing market.

If all one does is think long and hard about the notion that the falling stock price of a high quality stock reduces risk and enhances reward, this interview is hugely valuable. However, truly understanding whether the stock is quality is critical and requires work, which is one reason the industry loves the seductive appeal of momentum. Oh, until the music stops. Then.....

Perhaps someone can tell me why my understanding is wrong. In the interview Mr. Strong said that he knew the interest rates would come down (in the eighties) because the higher rates were destroying the economy in general and the financial (presumably FIRE) institutions specifically. If rates go up by even a few percent the same things will happen to the economy now. So presumably the rates are going to be forced to zero or lower.

All investing is a leap of faith. It seems to me that value investing is less of a leap of faith i.e., if the stock goes down it is an even better value bet. Whereas in momentum investing when a stock gets cut in half, it still may not be a value investment. DLS

I find it odd that the "top" value investor (Buffett) stepped in to help one of the worst players in the Canadian real estate sector: Home Capital Group Inc. [HCG]. Shorting the Canadian banks can be VERY risky. CIBC may be the best short of the bunch [CM].
Curious on other opinions.

In my opinion, there are a lot of better housing related short opportunities in Canada than the Canadian banks. A long-short Canadian equity portfolio that wants to take advantage of an epic housing bust in Vancouver and/or Toronto is more likely to be long Canadian banks as a high yielding, sector neutral, currency neutral offset to short positions paying high dividends that might eventually get cut. The Canadian banking sector is an oligopoly. It seems to me the Canadian banks regulate their regulator. Not the other way around.

Fantastic interview clearly laying out the attributes of value investing while offering some real gems of advice (e.g. a declining stock price can actually lower risk) along with a well articulated macro perspective and compelling short ideas. Covered all the bases. One of the best interviews on Real Vision to date.
Early in the interview, Mr. Strong mentions a New York City newspaper headline which was published in response to President Gerald Ford's statement that he would veto a federal bail out for struggling New York City. That headline, which ran in the New York Daily News on October 29, 1975, read FORD TO CITY: DROP DEAD. It virtually killed President Ford's chances of re-election in 1976 and has become one of the classic newspaper headlines of all time.

Absolutely no doubt it was the right thing to do. If government bails out poorly run cities that fail to manage unions , taxes, loans etc effectively you simply transfer all the risk to the public and bail out incompetent politicians and city managers. The same applies to the States and Territories. Look at Puerto Rico, it got itself into its own mess through poor (corrupt and political socialist) mentality, now it want a federal bailout? The public are increasingly taking all the risk and the loan makers just rake in the profits. Calpers is another disaster just waiting to happen...... Its just too big this time around to "fix". So what is going to happen? Don't know, but suspect it will be really ugly.

In the UK people have always piled into house ownership because supposedly property values never fall. I recall a documentary in 2005 on channel 4 where two journalists pretended to be a married couple looking for a mortgage. They were both aged about 30, a man and a woman, fairly typical but above average salaries, but because of high house prices they were struggling to afford a property. Out of ten mortgage brokers they consulted, nine advised them to lie about their income, and of those, three offered to provide them with fake pay slips. The attitude of the brokers was that this was routine and everyone does it. I figured then that a house price crash was inevitable in the UK, but we had to wait another 3 years. Of course, ultra low interest rates and immigration reflated the bubble, but the UK is much more densely populated than Canada or Australia.

Very good interview. I think if people want to short housing in Australia there are other firms that should get shorted too. Examples include Bingo Industries which is a waste management businesss. Well,if your thesis is “short Aussie housing” then short those companies whose revenue stream is predicated predominantly on new housing developments. I’m not recommending you short Bingo but rather don’t think so narrowly.

His points are not strong enough. This thesis has been a widow maker for US hedge funds for about 6 years and counting.
Rates won't rise far before the high debt and extended cycle global economy is strangled.
The Chinese middle class growth will continue to pour tourism, migration and agricultural & resource demand into Australia for decades. Australia remains at the centre of global growth for years ahead - Asia.
Regulators have been clamping down on spec loans to indigines and the Chinese for some years now.
Land is actually limited in Australia given the reality of city limits. Who builds the average house in the bush with no access to a job?
Land is a monopoly asset especially given urban planning laws which skims the cream off all economic growth (Henry George, Fred Harrison, Phillip J Anderson etc) thus will continue to appreciate in the long run.
I don't know why he thinks Australian banks are not very profitable. At 15% ROE they are head and shoulders above the ROW. This also explains why their dividends are always so juicy at 5% (CBA).

Given how low mortgage rates have been I don't think they have to go up much in absolute terms to cause a problem for the mortgage market - even a 1% increase in mortgage rates results in a big impact on mortgagors. A prolonged global recession will also burst the housing market as exports are a large part of the economy for Canada/Australia (i.e., a recession abroad leads to an economic slowdown/recession at home).

W.H.: The NZ housing market is relatively small compared to Australia, and since the banks are almost all subsidiaries of Aussie banks, NZ is arguably more vulnerable to a real estate downturn in Sydney than in Auckland. Also, one thing the interview missed is that Aussie banks have extensive interconnections with foreign (especially U.K.and American) banks, so it may be optimistic to think that a severe banking crash in Australia will be confined to the South Pacific region.

Australia is not in the centre of Asia, a flight from Beijing to Sydney is as long as one to London. CBA's ROE is high because it's incredibly highly geared, to the point of making Lehman look conservative.

NZ has a growing CA deficit and closing spreads vs. the US with Eurodollar funding stress. Not just a housing story, as is the case with AUS. Look at what has happened to NZ’s major builders and frontera recently.

There is another "great undoing" that is upon us. And that skyline in Miami that you gaze upon shows what is absolutely on the horizon. (And it is not lost on me either Grant!) It makes me think of Isaiah's undoing in the book of Isaiah. Thank you for Grant and Raoul for making this service so affordable. It will enable me to navigate the turbulent times ahead...along with God's wisdom.

Looking at the ADR's of Aussie/Canada Banks, the party started back in February with the first leg down and harder down from there. Mr. Strong really telling that the down story has arrived and will stay with the story revealed. Starting to really matter. If the size of this impact is so much bigger than 2008 for the USA, there must be other sectors which will benefit or fall when the crash happens. Which, if any, US Banks or companies have negative exposure to Canada & Aussie banking/real estate? I do love the discussion of patience and faith in the trade. Thx!

Westpac reported steep drop in margins on higher funding costs and cautioned that mtge DQs are on the rise! the major 4 banks have held off raising their home loan rates, with short term funding costs increasing will they begin to budge?

This is a personal comment. Out of the norm for me. I used to travel as an professional investor all of the time. Things changed in my personal life that meant I couldn't do that any longer. I invest from home now and one of the things that is hardest is not getting out and about to meet people. Those travels always led me to ideas. With Grant's series in particular, and many facets of RealVision overall, I feel less adrift and it has certainly helped my transition to doing this more remotely than before. I am very thankful you started this Company just as I needed it.

Grant, fantastic as always. I hope you can come back to Australia soon to catch up with Gerard Minack and Das for their views on the housing market.
Would also be great to understand their view on mortgage insurers such as Genworth (GMA) whose whole business model is based on consumers being willing to borrow at massive LVRs.
As a 30yo Australian the general 'facts' amongst peers are that; property always increases in value (that's been the experience of their parents and themselves), interest rates are always low and get lower, two members of a couple work and still pay 30-40 of income on mortgage repayments, recessions happen somewhere else and our friendly banker has convinced us that debt is cheaper than equity.
Once this psychology is finally broken and investors finally lose the capital appreciation that is making up this shortfall in rents vs holding costs I feel like there could be a significant shift towards renting becoming more culturally acceptable.
From a purely selfish interest I hope the party continues, but can't argue with the maths and effects of the larger debt and demographic cycles at play.
We are the bug that has hit the windscreen but just hasn't realized it yet.

As a 30yo Australian I can second this also, except that I've (foolishly in hindsight) sat out of the property market despite being in a position to enter since 21 (I thought it was too overpiced then!!).
Something that wasn't mentioned is the massive apartment construction boom occuring in major cities but particularly in my hometown Brisbane (which was becoming evident to any brisbane local more than a few years ago). I believe we currently have a dwelling oversupply as much as 12-18months ahead of the immigration and population growth forecasts. I know agents who sold apartments early last year on as much as a 40% loss from their value a year prior! The apartment crash was already in motion, and this was before the tightning of credit.

IMHO, Australia is about to experience a massive 'reality check', and the data/evidence is already showing the signs.
The mortgage lending scandal will make the GFC of 2008 look like a walk in the park.
Everyone in Australia is 'all in' on property and it won't end well! Short the Aussie banks.